Next Generation Supply Management Defined

Menu

Daily Archives: December 4, 2013

A recent manufacturing study found that 86% of organizations experienced significant supply chain disruptions in the last 12 months. In addition, a number of studies have proven that the rate of supply chain disruptions are increasing. This means at this point in time, the chances of your organization not experiencing a significant disruption in the next 24 months is 2% and dropping — fast!

It is true that certain disruptions, like those caused by natural disasters, cannot be prevented and others, like supplier failures that result from financial implosions as a result of undetected fraud or the unexpected loss of a major customer, cannot be predicted. But that doesn’t mean that there isn’t value in knowing about them as soon as they occur, because they can be mitigated, or at least minimized, with enough time to take appropriate action.

However, if your first indication of a disruption that happened months ago is when an expected shipment from a tier 1 supplier is 3 days late, it’s too late! If the disruption was the result of a natural disaster that wiped out multiple industrial parks in a region, and those parks produced over half of the world’s supply of the raw material or critical component that your goods require (such as storage drives for custom-built computer systems*), then by the time the shipment doesn’t show up, any excess supply has already been locked up by the competition.

There is a big value to visibility. How big? A recent IBM study, found that the average supply chain disruption is 6 weeks and that as a result of a disruption, sales decrease an average of 7% in the following year. If demand for your product was roughly constant over a year, that’s 1/8th or 12.5% of your sales wiped out overnight, plus additional losses of 7% in the following year as a result of customer defection, because it’s not likely that your customers are going to wait months for a product if your competitor has a similar product at a similar price point. In other words, kiss an average of 10% of your revenue on the affected product lines good-bye for the next two years.

However, if you can prevent the disruption, even if it means acquiring replacement inventory from a higher-cost supplier and using expedited shipping, you can prevent the vast majority of these losses. And even if your organization has to pay a 30% premium to prevent the supply chain disruption, given that the average organization spends 58% of revenue on sourced products and services, this means that the premium would be capped at 17% of affected revenue, or 2% of overall revenue vs the 10% of revenue that would be lost otherwise.

And if the only way to prevent the disruption is with enough advance warning, that says that the value of visibility in this example is 8% of the revenue at risk from a supply chain disruption. This is huge!

However, that’s just a small part of the value that Supply Chain Visibility can bring you. For deeper insight into the value of visibility, download SI’s latest white-paper on The ROI of Supply Chain Resiliency: It’s More Than You Think (Registration Required), sponsored by Resilinc. You might be surprised at how much hidden value you can extract from your Supply Management operations.

* As you might recall, the Thailand floods seriously damaged the factories that produced a significant number of the world’s hard drives, as Thailand is the world’s second largest producer of hard drives.